I’m searching for the best dividend shares to buy to make a winning passive income. By targeting big dividends today, I could have a better chance of generating life-changing wealth when I eventually retire.
I reinvest any dividends I receive to buy more UK shares which, in turn, gives me more dividends for further reinvestment. Over time, this powerful cash-building concept — known as compounding — can allow those with even a modest amount to invest each month to build a big nest egg for retirement.
And the more money I have to do this today, the quicker I can potentially meet my investing objectives. This is where the wisdom of buying shares with large dividend yields comes into play.
Dividend checklist
Of course, there’s more to sensible dividend investing that just concentrating on near-term dividend yields. As someone who invests for the long haul, I’m seeking companies that have a good chance of providing a decent dividend today and growing it over time.
So I’m also searching for companies that have several — or, ideally, all — of the following qualities:
Long records of dividend growth
Consistent earnings
Leading positions in growing markets
Diverse revenue streams
Economic moats (also known as competitive advantages)
Robust balance sheets (with strong cash flows and/or low debt)
Dividend cover of at least 2 times
10.9% dividend yield
With all of this in mind, I think Phoenix Group Holdings (LSE:PHNX) shares are worth serious consideration today.
Dividends are never guaranteed. But based on the company’s 10.9% forward dividend yield, a £20,000 investment right now could make me £2,180 in passive income this year alone. I could then reinvest this to help me make those significant compound gains I described.
The good news is that City analysts expect Phoenix to continue raising shareholder payouts through to 2026 too, driving the yield comfortably above 11%.
Year
Predicted dividend per share
Dividend yield
2024
54.3p
10.9%
2025
56.1p
11.2%
2026
57.5p
11.5%
Payout growth
As a financial services stock, Phoenix Group’s very vulnerable when economic conditions worsen and people have less money to spend. It lacks the earnings stability of businesses like utilities, defence and healthcare, for instance.
Earnings have certainly been volatile at Phoenix in recent years. Yet this FTSE 100 share still has an exceptional record of dividend growth, as shown in the graph below. Unlike many UK shares, Phoenix even continued to raise shareholder payouts during the pandemic.
Created with TradingView
This has been underpinned by the company’s rock-solid balance sheet, while market-leading positions in the mature life insurance and pensions markets have also helped to support payouts, despite tough conditions.
Phoenix is a cash machine and in 2023, it generated a whopping £2bn of cash, beating its £1.8bn target by a healthy margin.
And with a Solvency II capital ratio of 176% — at the upper end of its 140-180% target — the company looks in good shape to continue paying large and growing dividends through the forecast period.
As I say, I’m also looking for companies that can increase payouts over the long term. I’m confident Phoenix will be able to do this as Britain’s growing ageing population supercharges the life insurance and retirement products industry.
The post 10.9% yield! A top dividend share to consider for a £2,180 passive income appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
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A 10.6% yield but down 40% over 5 years! Time for me to buy more of this hidden FTSE 100 gem?
Should I buy Legal & General or Phoenix Group for a mega passive income?
5 FTSE 100 stocks to consider for a lifetime of passive income
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
